A repair puts a rental property back to the condition it was already in — fixing wear and tear, damage or something that’s broken. An improvement goes further: it makes the property better than it was, changes what it does, or replaces something outright. The Australian Taxation Office treats the two very differently at tax time, and getting the split wrong can mean claiming a deduction in the wrong year — or not at all.

This is general information about how the distinction generally works. Under section 25-10 of the Income Tax Assessment Act 1997, a repair is the remedying or making good of defects in, damage to, or deterioration of property — restoring its efficiency of function without changing its character. If work goes further and amounts to a substantial improvement, addition or alteration, it isn’t a repair and section 25-10 doesn’t apply (ATO Taxation Ruling TR 97/23). Tax outcomes depend on your circumstances — speak with a registered tax agent before acting.

What’s the difference between a repair and an improvement, in tax terms?

Broadly:

• A repair remedies existing damage, deterioration or wear and tear so the property keeps doing what it already did — repainting a wall, fixing a broken tap, replacing a few damaged roof tiles. It’s treated as a revenue expense.
• An improvement makes the property better, more valuable or functionally different from what it was — adding a new room, replacing an entire kitchen with a better one, or putting in something that wasn’t there before. It’s treated as capital.

The practical difference is timing and mechanism: a repair is generally an immediate deduction against your rental income in the year you pay for it, alongside costs like agent fees, insurance and interest. An improvement isn’t claimed all at once — it’s written off over a number of years (through the depreciation and capital works rules below), and it can also affect your capital gains tax (CGT) position when you eventually sell.

An “initial repair” — fixing a defect, damage or deterioration that already existed at the date you acquired the property — is capital in nature, not an immediate deduction, even though it looks like an ordinary repair. It doesn’t matter that you were unaware of the need for the repair when you bought the property. Initial repairs to the building itself are generally claimed as a capital works deduction over 40 years instead (ATO Repair and maintenance expenses guide; Taxation Ruling TR 97/23, paras 4–5).

Why does this actually matter for an investor?

The distinction changes three things at once:

1. When you get the deduction. A repair reduces your taxable rental income this year. An improvement is spread out — sometimes over decades.
2. How big this year’s rental result is. Because repairs are immediate deductions and improvements aren’t, the split affects whether your property shows a rental profit or a loss this year — which feeds directly into how negative gearing works (see below).
3. What happens when you sell. Capital costs can affect your CGT cost base; revenue costs generally don’t.

None of this is a reason to reclassify a cost to suit a preferred outcome — the ATO’s test looks at what the work actually was, not what a taxpayer would prefer to call it.

How are improvements deducted for tax?

Once something is capital, it falls into one of two regimes, and the two don’t overlap for the same piece of expenditure:

• Division 43 — capital works. This covers construction-type expenditure on the building or structure itself: an extension, a new deck, a full re-roof, structural renovation work. For residential rental capital works where construction began on or after 16 September 1987, the standard rate is 2.5% a year, claimed over 40 years (ATO capital works deductions guide). It’s a slow, structural write-off — not something you feel in a single tax return.
• Division 40 — depreciating assets. This covers separate items with a limited effective life that you can identify on their own — ovens, carpets, air-conditioners, hot water systems, furniture. These are deducted over the asset’s effective life instead of the 40-year capital works schedule.

Tax outcomes depend on your circumstances — speak with a registered tax agent before acting, particularly to work out which regime a given improvement falls into.

Does the second-hand asset rule affect improvements to an established rental property?

Yes, and it catches out a lot of investors who buy an existing (not new) property. Since 1 January 2018 — covering assets acquired at or after 7:30pm AEST on 9 May 2017 — a further restriction under the tax law cuts the Division 40 deduction, in practice usually to nil, for a depreciating asset used in a residential rental property where either:

• you didn’t hold the asset when it was first used or installed by any entity (i.e. it’s second-hand to you), or
• the asset was at some point used in one of your own homes, or used for a non-taxable purpose.

In plain terms: if you buy an established rental property, you generally can’t depreciate the existing oven, carpet or air-conditioner that came with it — only assets you buy new yourself afterwards, and even then the same rule applies again to whoever buys the property from you later. A handful of entity types are excepted from this restriction — companies, super funds other than SMSFs, managed investment trusts and public unit trusts — but an SMSF is not excepted, so an SMSF-owned residential property is squarely caught by it. Division 43 capital works deductions on the building itself are unaffected; this rule only touches Division 40 plant and equipment (Treasury Laws Amendment (Housing Tax Integrity) Act 2017, current law confirmed as at July 2026).

Do repairs and improvements affect capital gains tax when you sell?

Potentially, yes — and in opposite directions:

• Repairs have generally already been claimed as a rental deduction, so they typically aren’t counted again in your CGT cost base when you sell — you don’t get to claim the same cost twice.
• Improvements are different. Capital improvement expenditure can form part of your cost base, which reduces the capital gain calculated when you sell — specifically as the fourth element of the cost base: capital costs you incur for the purpose of increasing or preserving the asset’s value, or that relate to installing or moving it (s110-25(5) ITAA 1997; ATO cost base of assets guide). It can only be included to the extent it hasn’t already been claimed as an income tax deduction (for example, as a capital works deduction).

One related point is already confirmed: for a property bought before 20 September 1985 (pre-CGT), a major capital improvement made after that date can be treated as a separate CGT asset in its own right — potentially taxable even though the original pre-CGT property itself is exempt. Separately, from 1 July 2027, value that accrues on a pre-CGT asset after that date enters the CGT net under the enacted reform (see below) — a different rule again, not to be confused with the improvements-as-separate-asset point.

Tax outcomes depend on your circumstances — speak with a registered tax agent before acting.

How does the repair/improvement split interact with negative gearing — now, and from 1 July 2027?

Repairs and improvements both feed into your rental result, but they don’t do it the same way — and the rules around what happens to a rental loss are changing.

Current law (as at July 2026, applying up to and including the 2026-27 income year): the ATO describes negative gearing as what happens when you buy a rental property with borrowed money and your rental income is less than your deductible expenses (interest included), producing a net rental loss. Under current law, you can generally claim that loss against your rental income and your other income — salary, wages or business income — in the same tax return. If your other income isn’t enough to absorb it, you carry the excess forward. There’s no dollar cap and no rule limiting the loss to being used only against rental income. Because a repair is an immediate deduction, it can directly enlarge this year’s loss; an improvement, spread over years through Division 40/43, affects the result far more gradually.

What changes from 1 July 2027: under Act No. 49 of 2026 (royal assent 26 June 2026), a new rule quarantines residential rental deductions that exceed residential rental income from the 2027-28 income year onward. From that point, the loss can no longer be claimed against your other income — it can only be offset against residential capital gains or carried forward against future residential rental income. Interests already held before 7:30pm AEST on 12 May 2026 are grandfathered under the current rules. New residential dwellings are meant to be exempt from the quarantine, but the requirements that define a qualifying “new” dwelling for this purpose haven’t been published yet — no ministerial legislative instrument defining “new residential premises” for the s26-160(4) ITAA 1997 exemption has been registered on the Federal Register of Legislation or by the Treasury/ATO as at July 2026.

This is a genuine 2027-28 change to what happens with an existing rental loss — it does not alter how a repair or improvement is classified or deducted in the first place; it only changes what you can do with the resulting loss. Tax outcomes depend on your circumstances — speak with a registered tax agent before acting.

Does it matter how you own the property?

Yes, in principle — though no single ATO or Moneysmart page ranks the options, and this isn’t a should-I question with one right answer. The same repair-versus-improvement split applies whatever the ownership structure, but what happens with the resulting deduction (or loss) differs:

Structure	How a rental deduction/loss is generally used
Individual	Assessed at your own marginal tax rate; a net loss follows the current-law/negative-gearing-2027 rules above
Company	Dealt with at the company level, not passed straight through to shareholders; no access to the general 50% CGT discount
Discretionary/family trust	Net income (or loss treatment) generally flows to beneficiaries in proportion to their present entitlement
SMSF	Taxed at a concessional 15% fund rate, subject to super-law constraints (sole purpose test, in-house asset limits) that don’t apply to the other structures — and, as above, not excepted from the second-hand depreciating-asset restriction

Superannuation rules are complex and penalties for breaches are significant — seek advice from a licensed financial adviser before making SMSF decisions. For any structure, tax outcomes depend on your circumstances — speak with a registered tax agent before acting.

Repair vs improvement, at a glance

Factor	Repair	Improvement
What it does	Restores existing condition (fixes wear, damage, deterioration)	Makes the property better, different, or adds something new
Tax character	Revenue expense	Capital expenditure
When it’s deducted	Generally the same income year, in full	Over time — Division 43 (capital works, 2.5%/40yrs) or Division 40 (depreciating assets, over effective life)
Effect on this year’s rental result	Can directly increase a current-year rental loss	Reduces the result only gradually, one year’s depreciation/capital-works claim at a time
Effect on CGT cost base at sale	Generally none — already claimed as a deduction	Can form part of the cost base (fourth element, s110-25(5) ITAA 1997), reducing the capital gain

For the broader mechanics of buying and holding a residential investment — costs, risks and how the pieces fit together — see our guide to property investment in Australia. If you’re weighing how a rental result like this plays into cash flow, our piece on cash flow positive vs negatively geared property walks through that trade-off in more detail.

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General information only. This article provides general information and does not take into account your objectives, financial situation or needs. It is not financial product advice, tax advice or legal advice. Consider whether the information is appropriate for your circumstances and seek advice from a licensed professional before making financial decisions. MyBrix Pty Ltd ABN 37 669 479 636 is authorised representative 1304961 of Australian Financial Licensing Group, AFS Licence No. 269868. Brix are issued by MyBrix Properties Pty Ltd ACN 669 491 338. Before acquiring or selling Brix, read the Product Disclosure Statement and Target Market Determination available at mybrix.com.au.

[REVIEW: to be reviewed by a registered tax agent — arranged by Fadi]